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Income protection: Finding an answer to uncomfortable questions
If you’ve ever taken a moment to imagine your life as a lottery winner, then you’ll know how good our brains can be at painting vivid, happy images of the future.
Conversely, they are not so good at envisaging life’s more uncomfortable realities. When faced with these situations, a primal survival instinct kicks in and we automatically shut the idea down or deny the fact that it might happen to us. It’s effectively a hardwired mechanism to protect ourselves against scenarios that scare us.
Prior to the Spring of 2022, for example, few people would have given serious thought to the likelihood of their monthly wage being threatened by a global pandemic. And yet, almost overnight, many businesses found themselves in precarious financial positions and millions of employees found themselves being supported by the furlough scheme.
Protection in the face of adversity
On reflection, furlough can essentially be regarded as an income protection policy underwritten by the government. And having delivered such important benefits to so many, there is evidence that the experience led to increased awareness of the value of protection. Indeed, many people were forced to consider the implications of losing the financial stability provided by a monthly wage – something their brains might otherwise have instinctively dismissed.
Having been exposed to this vulnerability, younger generations – many of whom were furloughed – have shown increasing interest in income protection (IP). A study by one insurer carried out in December 2020 found that 8.3 million (48%) of those aged 25-44 without IP cover would consider taking out a policy to safeguard their earnings, while 7% of this demographic said they had been moved to purchase a protection product in the past three months.
Income protection is provided through a number of different policy types, principally divided into individual cover taken out on a personal basis and employer-provided cover taken out on an individual’s behalf by an employer – often in the form of group income protection.
In the case of owner-operator businesses and SMEs, where group income protection might not be deemed appropriate or justifiable, cover can also be offered to key personnel who are influential to the company’s success through executive IP policies.
Assurance during difficult times
Claims for IP policies are made when the policyholder is unable to work because of injury or illness. They are paid a monthly income to cover loss of earnings, with policies typically paying out after a pre-agreed waiting period. Payments help cover fixed monthly outgoings, such as mortgage payments and household bills, which could otherwise trigger financial difficulty, debt or defaults on loans.
Data from the Association of British Insurers indicates that the pandemic-driven rise in support for income protection products has been sustained over time, with sales up by nearly 10% in the first three months of 2022 compared with the same period the previous year.
Despite this growth and the apparent shift in mindset, however, the overall proportion of people with IP cover in place remains relatively low. One recent study found that while 43% of UK adults are worried about a loss of earnings due to personal illness, less than half of that number (17%) have, or are in the process of applying for, income protection policies that could provide the appropriate support in the event that such a situation arises.
Managing the risk of unknowns
Findings such as this indicate that the pandemic has prompted greater awareness of the value of income protection as well as a heightened appreciation that regular income can be impacted by factors outside of our control and, indeed, outside the control of the paymasters within a business. At the same time, factors such as the cost of living are being cited as reasons that this insight is not necessarily turning into policy purchases.
Ultimately, the key question to consider is how an employee – or indeed their employer – would cope if they found themselves affected by a long-term illness or injury. Do they have the appropriate financial safety net in place?
These are not necessarily comfortable scenarios to imagine. And avoiding them might have helped keep our hunter-gatherer ancestors motivated and focused rather than fearful and apprehensive, but it is not a mindset that serves us well in the 21st Century.
Here, the ability to accurately anticipate risk can have very valuable consequences. It can ensure we weigh up the odds and seek out the right tools to support ourselves and our families.
The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Wealth Management or any of its associated representatives shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.
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